Monday, November 28, 2011

According to the Fed, delinquency rates on consumer loans have fallen significantly since the last recession. This is a sure sign that consumers have been actively deleveraging, and that is good. The most recent reading on all consumer loans, 3.15%, is below the 3.5% average since this series began in 1987. The most recent reading on credit card delinquencies, 3.5%, is substantially below the 4.5% average since the series began in 1991. As I've noted before, this is also evidence that deleveraging does not destroy demand or otherwise necessarily weaken an economy. When a borrower pays down his debt, the lender must do something with the money received; either loan it to someone else or spend it on goods and services. Indeed, consumer deleveraging is a very normal part of a business cycle recovery, as this chart illustrates; it is not something to be feared.

HT: Mark Perry. And as he notes, if we could only get the U.S. government to demonstrate the same kind of financial responsibility as U.S. consumers have....

5 comments:

The US economy has been able to maintain weak growth primarily because the government has taken on more debt than the consumers have shed. Create a chart that aggregates debt from public and private sectors and see if there is any de-leveraging at all.

Ed R: Excess reserves have certainly gone up (and by a lot), but every dollar of excess reserves is a dollar that the Fed paid someone for a Treasury bond or a mortgage-backed security (which dollar was perforce spent on something else). The buildup of excess reserves is best thought of as the result of the Fed swapping bank reserves for bonds, not as the result of consumers paying down their debts.

Credit card debt is 6% of household debt. A mere pimple on the elephantine mortgage debt which boasts a delinquency rate of 10.2%. The bulk of deleveraging has and will continue to take place in residential housing.

Now that the New York Fed is finally up to speed on student loan debt, the delinquency rate in that credit bucket, which exceeds either the credit card or auto loan bucket, will be up, up and away.